By Tom Bradley
In his latest letter, Bill Gross of Janus Capital (he’s still the King of Bonds to me) asserts that central bankers’ views (including the U.S. Federal Reserve’s Janet Yellen’s) on near-zero interest rates are changing. In their deliberations, they’re starting to put more weight on the negative effects of this policy, as well as the hoped-for benefits.
In his letter, Mr. Gross underlines the following section:
But perhaps the recent annual report from the BIS - the Bank for International Settlements - says it best. The BIS is after all the central banks’ central banker, and if there be a shift in the "feed a fever" zero interest rate policy of the Fed and other central banks, perhaps it would be logically introduced here first. The BIS emphatically avers that there are substantial medium term costs of "persistent ultra-low interest rates". Such rates they claim, "sap banks’ interest margins ... cause pervasive mispricing in financial markets ... threaten the solvency of insurance companies and pension funds ... and as a result test technical, economic, legal and even political boundaries."
He goes on to say (also underlined):
Low interest rates may not cure a fever – they may in fact raise a patient’s temperature to life threatening status.
We’ve been quite vocal on the negative effects of near-zero rates for a while now. Let’s hope Mr. Gross is right and there’s more balance coming into the conversation, and hopefully some movement towards higher policy rates.